Netherland Reaches Austerity Deal, Ending Budget Impasse

Dutch Prime Minister Mark Rutte
Dutch Prime Minister Mark Rutte. Photographer: Jock Fistick/Bloomberg

The Dutch government struck an emergency austerity deal with the opposition to meet European Union budget rules, ending the impasse that raised the prospect the Netherlands could lose its top credit rating.

“This is an unbelievable achievement,” Prime Minister Mark Rutte said in parliament late yesterday. “Sticking to the 3 percent rule is not because that has been decided in Brussels but because we think it’s important as we can’t pass the bill on to future generations.”

The Netherlands needs to report to the European Commission by April 30 on how it plans to meet the EU’s budget-deficit limit of 3 percent of gross domestic product next year. Without additional austerity measures, the shortfall would have remained at 4.6 percent in 2013, breaching the ceiling for a fifth year.

The new package may help remove concerns among credit-rating companies including Standard & Poor’s, which on Jan. 13 changed its outlook on the Netherlands to negative. It said it sees at least a one-in-three chance that the country will lose its top grade in 2012 or 2013 should the economy deteriorate further.

Rutte submitted his Cabinet’s resignation on April 23 after Geert Wilders’s Freedom Party withdrew support for spending cuts and tax increases totaling about 14 billion euros ($18.5 billion). After that, investors demanded as much as 79 basis points of extra yield to lend to the Netherlands for 10 years rather than Germany, the highest premium in three years.

Budget Agreement

The spread between Dutch and German yields was at 54 basis points, or 0.54 percentage point, as of 5:16 p.m. in Amsterdam, compared with 56.5 basis points yesterday.

The deal, brokered in just two days, includes raising the highest value-added tax rate to 21 percent from 19 percent in October and doubling the bank tax to 600 million euros, Finance Minister Jan Kees de Jager wrote in a letter to parliament. Freezing civil servant pay will help reduce next year’s deficit to at least 3 percent of GDP, while a cut in development aid is annulled.

The parties also agreed to reform mortgage rules to reduce risks to households and lenders and cut spending by 5.4 billion euros. As of next year, the interest payments on new mortgages can only be deducted from taxable income if the loan is fully paid back within 30 years. The house-transaction tax, cut to 2 percent from 6 percent last year to help revive house sales, will remain at the reduced rate.

‘Bad Package’

De Jager’s Christian Democrats and Rutte’s Liberals were supported by the opposition Green Left, Christian Union and D66 democrats, which together hold 77 seats out of 150 in the lower house. The five parties would get 76 seats if elections were held today, according to a poll of about 4,500 people by researcher Maurice de Hond and No Ties BV published today. Wilders’s party would lose seven seats, leaving it with 17.

The Labor Party, Socialist Party as well as the Freedom Party didn’t back the agreement. “This is a bad package and the people with a state pension will pay the bill,” Wilders told parliament.

The austerity measures add up to more than 12 billion euros, De Volkskrant reported today. The finance ministry couldn’t give a total figure as details of the measures have yet to be finalized.

The Dutch economy, the fifth largest in the euro area, entered its second recession in three years during the latter half of last year. Unemployment has jumped to almost 6 percent from 5 percent in 12 months and house prices have fallen more than 10 percent since 2008, partly on speculation the government may cut tax breaks for homeowners.

“The measures will strengthen the economy because it deals with issues that have been on the table for decades,” De Jager said in parliament. “This is crucial for future generations.”

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